conquering the liquidity and pricing dilemma on … resources...annual interest expense $184,088.85...
TRANSCRIPT
![Page 1: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/1.jpg)
copy 2019 Darling Consulting Group Inc bull 260 Merrimac Street bull Newburyport MA 01950 bull Tel 9784630400 bull DarlingConsultingcom
Risk Management Strategy amp Solutions
FHLB Des Moines Regional Member Meetings
Spring 2019
Conquering the Liquidity and Pricing Dilemma on Both Sides of the Balance Sheet
copy 2019 Darling Consulting Group Inc Page 2
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 3 Page 3 copy 2019 Darling Consulting Group Inc
Todayrsquos Focus
Deposits Expect costs to continue to increase
Lending
Activity slowing while spreads tightening Institutions rethinking growth at thinner margins
Interest Rate Risk
Uncertainty abounds donrsquot lose sight of rates falling Market expects a rate cut before a rate hike
Regulatory
All eyes on liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 4 Page 4 copy 2019 Darling Consulting Group Inc
Liquidity Management 5 Areas of Focus
1 Identify Your Liquid Asset Cushion
2 Overcome Regulatory Pressures on PVL
3 Develop a Dynamic Forecast amp Stress Test Framework
4 Revitalize Your Risk Monitor
5 Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 5 Page 5 copy 2019 Darling Consulting Group Inc
FirsthellipAddressing Regulatory Concerns
Potentially volatile funding sources Understand your concentrations High rate deposits Uninsured deposits Single source concentrations
Liquid asset pressure
Dynamic forecasting and stress testing No one is immune
ldquoThe declining liquid asset cushions and increased use of potentially non-stable liquidity sourceshellipsuggest that small banks as a group are increasing their liquidity risk profileshelliprdquo ndash FDIC Supervisory Insights
Summer 2017
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 2: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/2.jpg)
copy 2019 Darling Consulting Group Inc Page 2
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 3 Page 3 copy 2019 Darling Consulting Group Inc
Todayrsquos Focus
Deposits Expect costs to continue to increase
Lending
Activity slowing while spreads tightening Institutions rethinking growth at thinner margins
Interest Rate Risk
Uncertainty abounds donrsquot lose sight of rates falling Market expects a rate cut before a rate hike
Regulatory
All eyes on liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 4 Page 4 copy 2019 Darling Consulting Group Inc
Liquidity Management 5 Areas of Focus
1 Identify Your Liquid Asset Cushion
2 Overcome Regulatory Pressures on PVL
3 Develop a Dynamic Forecast amp Stress Test Framework
4 Revitalize Your Risk Monitor
5 Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 5 Page 5 copy 2019 Darling Consulting Group Inc
FirsthellipAddressing Regulatory Concerns
Potentially volatile funding sources Understand your concentrations High rate deposits Uninsured deposits Single source concentrations
Liquid asset pressure
Dynamic forecasting and stress testing No one is immune
ldquoThe declining liquid asset cushions and increased use of potentially non-stable liquidity sourceshellipsuggest that small banks as a group are increasing their liquidity risk profileshelliprdquo ndash FDIC Supervisory Insights
Summer 2017
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 3: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/3.jpg)
copy 2019 Darling Consulting Group Inc Page 3 Page 3 copy 2019 Darling Consulting Group Inc
Todayrsquos Focus
Deposits Expect costs to continue to increase
Lending
Activity slowing while spreads tightening Institutions rethinking growth at thinner margins
Interest Rate Risk
Uncertainty abounds donrsquot lose sight of rates falling Market expects a rate cut before a rate hike
Regulatory
All eyes on liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 4 Page 4 copy 2019 Darling Consulting Group Inc
Liquidity Management 5 Areas of Focus
1 Identify Your Liquid Asset Cushion
2 Overcome Regulatory Pressures on PVL
3 Develop a Dynamic Forecast amp Stress Test Framework
4 Revitalize Your Risk Monitor
5 Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 5 Page 5 copy 2019 Darling Consulting Group Inc
FirsthellipAddressing Regulatory Concerns
Potentially volatile funding sources Understand your concentrations High rate deposits Uninsured deposits Single source concentrations
Liquid asset pressure
Dynamic forecasting and stress testing No one is immune
ldquoThe declining liquid asset cushions and increased use of potentially non-stable liquidity sourceshellipsuggest that small banks as a group are increasing their liquidity risk profileshelliprdquo ndash FDIC Supervisory Insights
Summer 2017
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 4: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/4.jpg)
copy 2019 Darling Consulting Group Inc Page 4 Page 4 copy 2019 Darling Consulting Group Inc
Liquidity Management 5 Areas of Focus
1 Identify Your Liquid Asset Cushion
2 Overcome Regulatory Pressures on PVL
3 Develop a Dynamic Forecast amp Stress Test Framework
4 Revitalize Your Risk Monitor
5 Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc
copy 2019 Darling Consulting Group Inc Page 5 Page 5 copy 2019 Darling Consulting Group Inc
FirsthellipAddressing Regulatory Concerns
Potentially volatile funding sources Understand your concentrations High rate deposits Uninsured deposits Single source concentrations
Liquid asset pressure
Dynamic forecasting and stress testing No one is immune
ldquoThe declining liquid asset cushions and increased use of potentially non-stable liquidity sourceshellipsuggest that small banks as a group are increasing their liquidity risk profileshelliprdquo ndash FDIC Supervisory Insights
Summer 2017
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 5: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/5.jpg)
copy 2019 Darling Consulting Group Inc Page 5 Page 5 copy 2019 Darling Consulting Group Inc
FirsthellipAddressing Regulatory Concerns
Potentially volatile funding sources Understand your concentrations High rate deposits Uninsured deposits Single source concentrations
Liquid asset pressure
Dynamic forecasting and stress testing No one is immune
ldquoThe declining liquid asset cushions and increased use of potentially non-stable liquidity sourceshellipsuggest that small banks as a group are increasing their liquidity risk profileshelliprdquo ndash FDIC Supervisory Insights
Summer 2017
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 6: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/6.jpg)
copy 2019 Darling Consulting Group Inc Page 6 Page 6 copy 2019 Darling Consulting Group Inc
Liquidity Trends
copy 2019 Darling Consulting Group Inc
Loan growth continues to outpace deposit growth
Institutions have shifted cash flows from investments into loans
Source SampP Global
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 7: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/7.jpg)
copy 2019 Darling Consulting Group Inc Page 7 copy 2019 Darling Consulting Group Inc Page 7
Identify Your Liquid Asset Cushion
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 8: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/8.jpg)
copy 2019 Darling Consulting Group Inc Page 8 Page 8 copy 2019 Darling Consulting Group Inc
Identify Liquid Asset Cushion
TOTAL ASSETS =Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations)
Security Collateral
Total Market Value of SecuritiesLess Securities Pledged to
FHLBFed DiscountOther Secured
Wholesale ReposRetail ReposSweeps
Municipal DepositsOther
Available Unencumbered Security Collateral
Total Unpledged Securities
Over Collateralized Securities Pledging Position
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets
TOTAL LIQUID ASSETS 102
0
Pct Of Assets0
122500
0
35000 47500 0
82500
0 0 00 -25000 00 -10000 0
0 0 00 0 0
0 0 0
35000 85000 0
MunisCollateral Value 100 95 90
UST amp Agency MBS CMOsAgency Backed
I LIQUID ASSETS
400001200000
![Page 9: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/9.jpg)
copy 2019 Darling Consulting Group Inc Page 9 Page 9 copy 2019 Darling Consulting Group Inc
Strategy Considerations
Define liquid asset cushion
May have to be more offensive in deposit pricing strategies
Consider alternative pledging options
Maximize alternative funding sources
Defend with ldquoTotalrdquo liquidity (next slide)
If ldquotighterrdquo liquid asset cushion then consider
Keep cash to work Identify ability to shift
liquidity into loans Consider more of a
defensive deposit strategy
Maximize alternative funding sources
Develop a strong contingency funding plan
If ldquostrongerrdquo liquid asset cushion then consider
copy 2019 Darling Consulting Group Inc Page 10 copy 2019 Darling Consulting Group Inc Page 10
Availability of Wholesale Funding Channels
copy 2019 Darling Consulting Group Inc Page 11 Page 11 copy 2019 Darling Consulting Group Inc
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
Wholesale FundingEncouraged not Villainized
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
copy 2019 Darling Consulting Group Inc Page 12 Page 12 copy 2019 Darling Consulting Group Inc
Total Liquidity Focus
Reserve based on funding concentrations
Available borrowing capacity vs wholesale reliance
Brokered capacity
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coveragesof CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Daysof Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
1200000
120000
385000 321
265000 221
IV BROKERED DEPOSIT ACCESS
325000105000
220000
III QUALIFYING FHLB LOAN COLLATERAL
420000325000
77500
45000 38
30 500010 65000
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
5000
25 2500
![Page 10: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/10.jpg)
copy 2019 Darling Consulting Group Inc Page 10 copy 2019 Darling Consulting Group Inc Page 10
Availability of Wholesale Funding Channels
copy 2019 Darling Consulting Group Inc Page 11 Page 11 copy 2019 Darling Consulting Group Inc
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
Wholesale FundingEncouraged not Villainized
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
copy 2019 Darling Consulting Group Inc Page 12 Page 12 copy 2019 Darling Consulting Group Inc
Total Liquidity Focus
Reserve based on funding concentrations
Available borrowing capacity vs wholesale reliance
Brokered capacity
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coveragesof CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Daysof Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
1200000
120000
385000 321
265000 221
IV BROKERED DEPOSIT ACCESS
325000105000
220000
III QUALIFYING FHLB LOAN COLLATERAL
420000325000
77500
45000 38
30 500010 65000
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
5000
25 2500
![Page 11: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/11.jpg)
copy 2019 Darling Consulting Group Inc Page 11 Page 11 copy 2019 Darling Consulting Group Inc
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
Wholesale FundingEncouraged not Villainized
ldquoAn institution should diversify available funding sources in the short- medium- and long-term Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds consistent with the
institutions sophistication and complexityrdquo
ndash Interagency Policy Statement on Liquidity Spring 2010
copy 2019 Darling Consulting Group Inc Page 12 Page 12 copy 2019 Darling Consulting Group Inc
Total Liquidity Focus
Reserve based on funding concentrations
Available borrowing capacity vs wholesale reliance
Brokered capacity
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coveragesof CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Daysof Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
1200000
120000
385000 321
265000 221
IV BROKERED DEPOSIT ACCESS
325000105000
220000
III QUALIFYING FHLB LOAN COLLATERAL
420000325000
77500
45000 38
30 500010 65000
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
5000
25 2500
![Page 12: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/12.jpg)
copy 2019 Darling Consulting Group Inc Page 12 Page 12 copy 2019 Darling Consulting Group Inc
Total Liquidity Focus
Reserve based on funding concentrations
Available borrowing capacity vs wholesale reliance
Brokered capacity
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coveragesof CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Daysof Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
1200000
120000
385000 321
265000 221
IV BROKERED DEPOSIT ACCESS
325000105000
220000
III QUALIFYING FHLB LOAN COLLATERAL
420000325000
77500
45000 38
30 500010 65000
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
5000
25 2500
![Page 13: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/13.jpg)
copy 2019 Darling Consulting Group Inc Page 13 copy 2019 Darling Consulting Group Inc Page 13
Revitalize Your Risk Monitor
copy 2019 Darling Consulting Group Inc Page 14
Revisit Your Risk Monitor
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 15
Management Response
Potential volatile liabilities have increased to 29 and have triggered Risk Level 1 Management has applied a low stress level response as the total liquidity position (on-balance sheet as well as access to wholesale funding) remains strong Additionally the high concentration of volatile deposits have been analyzed and defended based on the strong core relationship with the customers Management will continue to closely monitor changes to liquidity levels moving forward
copy 2019 Darling Consulting Group Inc Page 16 Page 16 copy 2019 Darling Consulting Group Inc
Identify At-Risk Customer Concentration (Potentially Volatile Liabilities)
copy 2019 Darling Consulting Group Inc Page 17 copy 2019 Darling Consulting Group Inc Page 17
High Rate Deposits (eg reference point = national rate caps)
Uninsured Deposits
Concentrations (eg depositors Funding Types amp Potential Risk Municipal Public Funding Reciprocal Depositors Large Single Source Relationships (eg gt=2 of total deposits)
Areas of PVLshellipRegulatory Focus
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 14: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/14.jpg)
copy 2019 Darling Consulting Group Inc Page 14
Revisit Your Risk Monitor
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 15
Management Response
Potential volatile liabilities have increased to 29 and have triggered Risk Level 1 Management has applied a low stress level response as the total liquidity position (on-balance sheet as well as access to wholesale funding) remains strong Additionally the high concentration of volatile deposits have been analyzed and defended based on the strong core relationship with the customers Management will continue to closely monitor changes to liquidity levels moving forward
copy 2019 Darling Consulting Group Inc Page 16 Page 16 copy 2019 Darling Consulting Group Inc
Identify At-Risk Customer Concentration (Potentially Volatile Liabilities)
copy 2019 Darling Consulting Group Inc Page 17 copy 2019 Darling Consulting Group Inc Page 17
High Rate Deposits (eg reference point = national rate caps)
Uninsured Deposits
Concentrations (eg depositors Funding Types amp Potential Risk Municipal Public Funding Reciprocal Depositors Large Single Source Relationships (eg gt=2 of total deposits)
Areas of PVLshellipRegulatory Focus
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 15: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/15.jpg)
copy 2019 Darling Consulting Group Inc Page 15
Management Response
Potential volatile liabilities have increased to 29 and have triggered Risk Level 1 Management has applied a low stress level response as the total liquidity position (on-balance sheet as well as access to wholesale funding) remains strong Additionally the high concentration of volatile deposits have been analyzed and defended based on the strong core relationship with the customers Management will continue to closely monitor changes to liquidity levels moving forward
copy 2019 Darling Consulting Group Inc Page 16 Page 16 copy 2019 Darling Consulting Group Inc
Identify At-Risk Customer Concentration (Potentially Volatile Liabilities)
copy 2019 Darling Consulting Group Inc Page 17 copy 2019 Darling Consulting Group Inc Page 17
High Rate Deposits (eg reference point = national rate caps)
Uninsured Deposits
Concentrations (eg depositors Funding Types amp Potential Risk Municipal Public Funding Reciprocal Depositors Large Single Source Relationships (eg gt=2 of total deposits)
Areas of PVLshellipRegulatory Focus
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 16: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/16.jpg)
copy 2019 Darling Consulting Group Inc Page 16 Page 16 copy 2019 Darling Consulting Group Inc
Identify At-Risk Customer Concentration (Potentially Volatile Liabilities)
copy 2019 Darling Consulting Group Inc Page 17 copy 2019 Darling Consulting Group Inc Page 17
High Rate Deposits (eg reference point = national rate caps)
Uninsured Deposits
Concentrations (eg depositors Funding Types amp Potential Risk Municipal Public Funding Reciprocal Depositors Large Single Source Relationships (eg gt=2 of total deposits)
Areas of PVLshellipRegulatory Focus
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 17: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/17.jpg)
copy 2019 Darling Consulting Group Inc Page 17 copy 2019 Darling Consulting Group Inc Page 17
High Rate Deposits (eg reference point = national rate caps)
Uninsured Deposits
Concentrations (eg depositors Funding Types amp Potential Risk Municipal Public Funding Reciprocal Depositors Large Single Source Relationships (eg gt=2 of total deposits)
Areas of PVLshellipRegulatory Focus
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 18: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/18.jpg)
copy 2019 Darling Consulting Group Inc Page 18 copy 2019 Darling Consulting Group Inc Page 18
Product National Rate
Rate Cap
Savings 010 085
Checking 006 081
MMDA 018 093
6M CD 038 113
12M CD 065 140
24M CD 085 160
36M CD 098 173
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 009 084
6M CD 017 092
12M CD 029 104
24M CD 044 119
36M CD 059 134
Product National Rate
Rate Cap
Savings 006 081
Checking 004 079
MMDA 008 083
6M CD 013 088
12M CD 022 097
24M CD 036 111
36M CD 049 124
Regulatory Concerns High Rate Deposits
December 2016 December 2017 March 2019
Fed Funds 75 FHLB 1 Year 115
Brokered CD 1 Year 110
150 205 190
225 270 245
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 19: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/19.jpg)
copy 2019 Darling Consulting Group Inc Page 19 Page 19 copy 2019 Darling Consulting Group Inc
Local Deposit Rates vs FDIC Rate Caps
SampP Global
FDIC High Rate Deposit levels (as of 3419)
FHLB Dividend Adjusted Rates (3419)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 20: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/20.jpg)
copy 2019 Darling Consulting Group Inc Page 20 copy 2019 Darling Consulting Group Inc Page 20
High Rate Deposit (per National Rate Caps)
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 21: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/21.jpg)
copy 2019 Darling Consulting Group Inc Page 21 copy 2019 Darling Consulting Group Inc Page 21
Uninsured Deposits Relationships
50 of Total Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 22: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/22.jpg)
copy 2019 Darling Consulting Group Inc Page 22 copy 2019 Darling Consulting Group Inc Page 22
Uninsured Customer Segmentation
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 23: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/23.jpg)
copy 2019 Darling Consulting Group Inc Page 23 copy 2019 Darling Consulting Group Inc Page 23
Potentially Volatile Uninsured Customer Base
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 24: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/24.jpg)
copy 2019 Darling Consulting Group Inc Page 24 copy 2019 Darling Consulting Group Inc Page 24
Develop a Dynamic Forecast amp Stress Test Framework
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 25: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/25.jpg)
copy 2019 Darling Consulting Group Inc Page 25
Dynamic Liquidity Forecast
Source Liquidity360degreg
$40MM loan growth $34MM deposit growth
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 26: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/26.jpg)
copy 2019 Darling Consulting Group Inc Page 26
Dynamic Liquidity Forecast
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 27: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/27.jpg)
copy 2019 Darling Consulting Group Inc Page 27 Page 27 copy 2019 Darling Consulting Group Inc
Liquidity Stress Testing
bull Collateral haircuts bull Loan Cash Flows (NPAs ProductionGrowth) bull Deposit Runoff bull Below well-capitalized (low probabilityhigh risk)
Contracting Economy
bull Loan growth gt deposit growth bull Collateral Valuations (ie depreciation) bull Higher wholesale levels
Expanding Economy
bull Deposit concentrations (Potential Volatility) bull ICSCDARs bull Loan concentrations
Institution-Specific
bull Industry specific bull Environmental threats Regional
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 28: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/28.jpg)
copy 2019 Darling Consulting Group Inc Page 28
Liquidity Stress Testing amp Key Components
Deposit runoff (from study) Increased haircuts (last crisis)
Remove unsecured funding lines How long until we feel the pressure
Moderate Stress Scenario
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 29: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/29.jpg)
copy 2019 Darling Consulting Group Inc Page 29
Worst Case Scenario amp Remediation Plan Severe Stress Scenario
Severe Stress Scenario Remediation Plan
Source Liquidity360degreg
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 30: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/30.jpg)
copy 2019 Darling Consulting Group Inc Page 30 copy 2019 Darling Consulting Group Inc Page 30
Deposit Strategies to Improve Liquidity
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 31: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/31.jpg)
copy 2019 Darling Consulting Group Inc Page 31 Page 31 copy 2019 Darling Consulting Group Inc
Industry Deposit Pricing Trends
Beta Beta Historical Regression Analysis Recent Regression AnalysisFull Rise +425bps Q1 04 - Q2 07 46 Full Recent Rise +225bps Q3 15 - Q4 18 16
First 125bps Q1 04-Q4 04 9 First 125bps Q3 15 - Q4 17 8Next 100bps Q4 04 -Q2 05 31 Last 100bps Q4 17 - Q4 18 30Next 100bps Q2 05-Q4 05 47Last 100bps Q4 05-Q2 07 103
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 32: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/32.jpg)
copy 2019 Darling Consulting Group Inc Page 32
The Attrition Concern
2017 Trend 2018 Trend
2017 Trend
2018 Trend
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 33: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/33.jpg)
copy 2019 Darling Consulting Group Inc Page 33 copy 2019 Darling Consulting Group Inc Page 33
Better to Be Offensive or Defensive Cannibalization
Benchmark Wholesale
Costs
20 Attrition replaced 275 80 Retention 050
NEW FUNDS COST ANALYSIS
Term FHLB (Net Stock Dividend)
90-Day 246
1 256
2 259
3 261
4 265
5 269
7 296
10 319
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 34: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/34.jpg)
copy 2019 Darling Consulting Group Inc Page 34 Page 34 copy 2019 Darling Consulting Group Inc
DEFENSIVE DEPOSIT TACTICShellip Monitoring and Managing Attrition
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 35: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/35.jpg)
copy 2019 Darling Consulting Group Inc Page 35
Analyzing Attrition
2017 Trend 2018 Trend
2017 Trends 2018 Trends Source Deposits360degtrade
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 36: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/36.jpg)
copy 2019 Darling Consulting Group Inc Page 36 copy 2019 Darling Consulting Group Inc Page 36
Watch List Top 10 Outflows
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 37: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/37.jpg)
copy 2019 Darling Consulting Group Inc Page 37 copy 2019 Darling Consulting Group Inc Page 37
Watch List Declining Balances
Source Deposits360degreg
Relationships at Risk
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 38: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/38.jpg)
copy 2019 Darling Consulting Group Inc Page 38 copy 2019 Darling Consulting Group Inc Page 38
Canrsquot Afford to Lose Top Customers Today
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 39: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/39.jpg)
copy 2019 Darling Consulting Group Inc Page 39 copy 2019 Darling Consulting Group Inc Page 39
Customer Segmentation
Single Source Customers
Core Customers
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 40: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/40.jpg)
copy 2019 Darling Consulting Group Inc Page 40 copy 2019 Darling Consulting Group Inc Page 40
Customer Profile OpportunityRisk
Savings = $850k 1 Account
Savings Rate = 015
No Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 41: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/41.jpg)
copy 2019 Darling Consulting Group Inc Page 41 copy 2019 Darling Consulting Group Inc Page 41
Customer Profile High Value amp Low CosthellipRisk
Savings = $2M NOW = $25k
4 Accounts
Savings Rate = 005
Additional Services with the Institution Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 42: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/42.jpg)
copy 2019 Darling Consulting Group Inc Page 42 Page 42 copy 2019 Darling Consulting Group Inc
Next Move on MMDAs
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 43: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/43.jpg)
copy 2019 Darling Consulting Group Inc Page 43 copy 2019 Darling Consulting Group Inc Page 43
MMDA Current Tiers $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalRate (on Bank website) 010 015 020 020 030 030 030 027Balance $4345018 $23776345 $63923061 $99616061 $82027208 $66224769 $418691192 $758603654 of Total MMDA 1 3 8 13 11 9 55 100Annual Interest Expense $434502 $3566452 $12784612 $19923212 $24608162 $19867431 $125607358 $206791729
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalRate 020 020 030 030 030 030 027Balance $92044423 $99616061 $148251977 $116543910 $132505579 $169641704 $758603654 of Total MMDA 12 13 20 15 17 22 100Annual Interest Expense $18408885 $19923212 $44475593 $34963173 $39751674 $50892511 $208415048
Alternative TierPricing Adjustments to Maintain Current Cost of Funds
MMDA Tier Analysis ndash Alternative Adjustments
of Balance Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 44: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/44.jpg)
copy 2019 Darling Consulting Group Inc Page 44 copy 2019 Darling Consulting Group Inc Page 44
A change in tier structure could Provide incentives for largest customers Allow more pricing flexibility as rate rise Entice lower-balance customers to increase wallet share
MMDA Tier Analysis ndash Pricing Flexibility
Incremental Interest Expense as Rates Rise (Per +25bp)Fed Funds Increase 025MMDA Current Tier $0-$25k $25-$10K $10k-$25k $25k-$50k $50k-$75k $75k-$100K $100k+ TotalBeta 25 25 50 50 75 75 80 71Balance $434501800 $2377634500 $6392306100 $9961606100 $8202720800 $6622476900 $41869119200 $75860365400Additional Expense $271564 $1486022 $7990383 $12452008 $15380102 $12417144 $83738238 $133735460
A lternat ive Tiers $0-$25K $25k-$50K $50k-$100k $100k-$150k $150k-$250MM $250K+ TotalBeta 25 50 50 75 100 100 71Balance $9204442300 $9961606100 $14825197700 $11654391000 $13250557900 $16964170400 $75860365400Additional Expense $5752776 $12452008 $18531497 $21851983 $33126395 $42410426 $134125085
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 45: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/45.jpg)
copy 2019 Darling Consulting Group Inc Page 45 copy 2019 Darling Consulting Group Inc Page 45
Introducing New MMDA Product
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 46: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/46.jpg)
copy 2019 Darling Consulting Group Inc Page 46 copy 2019 Darling Consulting Group Inc Page 46
Legacy MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA amp CDs Maintain $100MM at just 30 bps
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 47: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/47.jpg)
copy 2019 Darling Consulting Group Inc Page 47 Page 47 copy 2019 Darling Consulting Group Inc
OFFENSIVE DEPOSIT TACTICShellip Deposit Promotions and Campaigns
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 48: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/48.jpg)
copy 2019 Darling Consulting Group Inc Page 48 copy 2019 Darling Consulting Group Inc Page 48
Key Questions on Deposit Promotions What drives pricing decisions competition or liquidity needs
How much are the promotions really costing me
Will I have more success on a CD or NMD promotion
What hurdles (ie requirements) should be included
Should I target-market (vs ldquobillboardrdquo campaign)
Is my front-line staff prepared
Maximize New Money amp Minimize Cannibalization
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 49: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/49.jpg)
copy 2019 Darling Consulting Group Inc Page 49 copy 2019 Darling Consulting Group Inc Page 49
Unsuccessful CD Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 50: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/50.jpg)
copy 2019 Darling Consulting Group Inc Page 50 copy 2019 Darling Consulting Group Inc Page 50
What Works Better CD vs MMDA Promotion
MMDA Special Source Deposits360degreg
11 Month CD Special
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 51: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/51.jpg)
copy 2019 Darling Consulting Group Inc Page 51 copy 2019 Darling Consulting Group Inc Page 51
New Market Promotion
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 52: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/52.jpg)
copy 2019 Darling Consulting Group Inc Page 52 copy 2019 Darling Consulting Group Inc Page 52
Indexed MMDA New Money Match
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 53: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/53.jpg)
copy 2019 Darling Consulting Group Inc Page 53 copy 2019 Darling Consulting Group Inc Page 53
Successfully CD Promotion New Money Minimum
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 54: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/54.jpg)
copy 2019 Darling Consulting Group Inc Page 54 copy 2019 Darling Consulting Group Inc Page 54
CD Specials Post Maturity
Retained 87 of CD Special Balances
Source Deposits360degreg
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 55: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/55.jpg)
copy 2019 Darling Consulting Group Inc Page 55 Page 55 copy 2019 Darling Consulting Group Inc
Lending Strategies
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 56: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/56.jpg)
copy 2019 Darling Consulting Group Inc Page 56
Fixed Rate Lending ldquoWhatrsquos the Buzzrdquo The ldquoMatched Fundingrdquo Myth Pressures to Extend Some Negotiation Strategies Revisiting Adjustable CRE Repricing TermsConditions Front Running Refinancing Risk Prepayment Penalties ldquoThe Great Giveawayrdquo Relationship Managers vs Lenders Whatrsquos in a Name Loan Pricing Models Why Changes in Derivatives Accounting Matter Some Comments on ResidentialConsumer Lending
Lending Discussion Items
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 57: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/57.jpg)
copy 2019 Darling Consulting Group Inc Page 57 copy 2019 Darling Consulting Group Inc Page 57
Pricing Interest Rate RiskhellipSwap Benchmarking
Start with Floating Rate Reference Quote (based on credit premium) Example - Prime + 050
ldquoConvertrdquo Floating to Fixed Quotes Using Swap Rates
Loan Pricing
Borrower Bank CU BrokerDealer Receive Fixed Rate (5yrs)
Receive Variable Rate Pay Variable Rate
Interest Rate Swap Mechanics
WSJP = 550
529
WSJP + 050 = 600
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 58: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/58.jpg)
copy 2019 Darling Consulting Group Inc Page 58
Lower Rates Opportunities amp Challenges Some Discussion Itemshellip
As of March 2019
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 59: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/59.jpg)
copy 2019 Darling Consulting Group Inc Page 59
Loan Repricing Schedule
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 60: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/60.jpg)
copy 2019 Darling Consulting Group Inc Page 60
CRE Repricing Risk Opportunity Merit to pro-actively renegotiating prior to contractual reset
Could any of these loans go elsewhere at reset Can we pro-actively lock in at a higher rate (albeit lower
than contractual reset) and recast prepayment penalties additional fees
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 61: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/61.jpg)
copy 2019 Darling Consulting Group Inc Page 61 Page 61 copy 2019 Darling Consulting Group Inc
Asset Sensitive
Liability Sensitive
Awareness Varies
Appetites Vary
Biases ldquoGet In The Wayrdquo
Liability Sensitive Asset Sensitive
Few ldquoDo Not Haverdquo Fixed Rate Capacity
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 62: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/62.jpg)
copy 2019 Darling Consulting Group Inc Page 62 Page 62 copy 2019 Darling Consulting Group Inc
Interest Rate Risk
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 63: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/63.jpg)
copy 2019 Darling Consulting Group Inc Page 63
Challenges of a Flattening Yield Curve
Asset Yields
Funding Costs
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 64: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/64.jpg)
copy 2019 Darling Consulting Group Inc Page 64 copy 2019 Darling Consulting Group Inc Page 64
Donrsquot Fall into the Flat Yield Curve Trap
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 65: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/65.jpg)
copy 2019 Darling Consulting Group Inc Page 65 copy 2019 Darling Consulting Group Inc Page 65
5 Common Missteps Short-term simulations (1-2 years) Focus specifically on rising rates Focus on shocks vs ramps Statistical review vs graphical analysis Industry standard assumptions
FirsthellipUnderstand Your IRR Position
Asset Sensitive
A Little of Both
Liability Sensitive
No ldquoOne Size Fits All ndash Depends on Your Risk Profile
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 66: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/66.jpg)
copy 2019 Darling Consulting Group Inc Page 66
Strategy Considerations Asset Sensitive IRR Profile
Considerations Extend cashpre-invest Consider buying call protection Mismatched leverage Understand capacity to extend
assets (ldquocore fundingrdquo utilization)
Flexibility with commercial deals and structures
Hold portion of fixed rate mortgages
Positioning of wholesale funding and deposit specials
Understand role of derivatives (floors receive fixed swaps etc)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 67: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/67.jpg)
copy 2019 Darling Consulting Group Inc Page 67
Liability Sensitive
Risk Profile Presentation MattershellipGreatly
BASE SIMULATION AS OF 6302018
025
225
425
625
825
025
Net Interest Income ($000)
Base Down 100BP Up 200BP
BASE SIMULATION
025
225
425
625
825
025
Net Interest Income ($000)
1 Year Simulation 2 Year Simulation 5 Year Simulation
Base Down 100BP Up 200BP
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 68: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/68.jpg)
copy 2019 Darling Consulting Group Inc Page 68
Strategy Considerations Liability Sensitive IRR Profile
Considerations Balancing exposure to both rising
and falling rates If extending Understanding how
far and how much of protection Cost of insurance Understand
most effective options Should be able to extend assets if
disciplined with funding Deposit strategy new money
focus SwapsCaps (last of layer
approach)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 69: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/69.jpg)
copy 2019 Darling Consulting Group Inc Page 69 Page 69 copy 2019 Darling Consulting Group Inc
New Derivatives Hedging Accounting Highlights
Cash Flow Hedge (Lengthen Assets) Swapping Prime Floating Loans to
Fixed Rate Credit Spreads No Longer Matter Greater flexibility in establishing pools
Interest Rate Floors Straight Line Premium Amortization
Fair Value Hedge (Shorten Liabilities) Swapping Fixed Rate Debt to
Floating Can Hedge Partial Term vs Entire Term
Asset Sensitive Considerations
Fair Value Hedge (Shorten Assets) Swap Pool of Fixed Rate Assets to
Floating ldquoLast-Of-Layerrdquo Method Allows for Partial Term hedging
Cash Flow Hedge (Lengthen Liabilities) Interest Rate Caps Straight Line Premium
Amortization Extend funding with same annual insurance cost
Liability Sensitive Considerations
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 70: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/70.jpg)
copy 2019 Darling Consulting Group Inc Page 70 Page 70 copy 2019 Darling Consulting Group Inc
Case Study 1
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 71: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/71.jpg)
copy 2019 Darling Consulting Group Inc Page 71
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
20001000
3000
800 405 421 408
66 65400 305 321 308 288 287
66 72 58
337
510000 00 00 00
41 38
41 38 38 48 51
11302018 8312018 5312018 2282018 11302017
38 48
388
Policy Guidelines
Liquidity Interest Rate Risk amp Capital
Executive Summary
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 72: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/72.jpg)
copy 2019 Darling Consulting Group Inc Page 72
Liquidity Overview Basic Surplus
Overnight Funds Sold amp Short-Term Investments (avg balance if wide daily fluctuations) TOTAL ASSETS =
Security Collateral
Total Market Value of Securities Less Securities Pledged to
FHLB On-Balance Fed DiscountOther Secured Sheet Liquidity =
Wholesale Repos Retail ReposSweeps
Municipal Deposits Other
Available Unencumbered Security Collateral
Over Collateralized Securities Pledging Position
Government Guaranteed Loans
Cash flow (lt 30 Days) from Securities not listed above
Other Liquid Assets (Int Bearing Deposits MM Mutual Funds etc)
TOTAL LIQUID ASSETS
47554 43689
-1493 0
0 0
0
0
0
00 0
000
0
000
1059061
Pct Of Assets
120
Pct OfAmount Assets147090 139
0
91243
478
1397
0
126603
49524 45988
-478 0
I LIQUID ASSETS
33486
UST amp Agency
Collateral Value 100 90
MBS CMOsPrivate LabelAgency Backed
950
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 73: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/73.jpg)
copy 2019 Darling Consulting Group Inc Page 73
Liquidity Overview Basic Surplus
Maturing Unsecured Liabilities (lt 30 Days)
Deposit Coverages of Regular CDs Maturing lt 30 Daysof Jumbo CDs Maturing lt 30 Days of Other Deposits
TOTAL SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
BASIC SURPLUS
A Maximum Borrowing Line at FHLB (Up to 50 of Assets)B Qualifying Loan Collateral at the FHLB (net of haircut)C Excess Loan Collateral (if A lt B)
Maximum Borrowing Capacity (Lesser of A or B)Collateral Currently Encumbered by Outstanding AdvancesLetters of Credit
REMAINING FHLB LOAN BASED BORROWING CAPACITY
BASIC SURPLUS W FHLB
Maximum Board Authorized Brokered Deposit Capacity (10 of Total Assets)Current Brokered Deposit Balances
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS
BASIC SURPLUS W FHLB amp BROKERED DEPOSITS
105906
of Total Deposits63
253210
296714
56323
529530296714
429395
0
105906
IV BROKERED DEPOSIT ACCESS
Well Capitalized
lt Well Capitalized
Policy Limits (Min)
43504
III QUALIFYING FHLB LOAN COLLATERAL
10 53179
25 129430
II SHORT TERM POTENTIALLY VOLATILE LIABILITIES amp COVERAGES
0
1850
323489
405 80
66 20
305
70280
40 80
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 74: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/74.jpg)
copy 2019 Darling Consulting Group Inc Page 74 copy 2019 Darling Consulting Group Inc Page 74
90-Day Liquidity Forecast
Net Loan Growth $25MM
Net Deposit Flows $5MM
Net Cash Flow $-20MM
CashInvestment Cash Flow Due $38MM
Wholesale Funding Maturities $10MM
How Much Liquidity Do We Need
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 75: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/75.jpg)
copy 2019 Darling Consulting Group Inc Page 75
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 76: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/76.jpg)
copy 2019 Darling Consulting Group Inc Page 76
Strategy Discussion
Deposit Trends
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 77: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/77.jpg)
copy 2019 Darling Consulting Group Inc Page 77
Strategy Discussion Loan Pricing
Origination Yields Since Last Fall
467 496 455 446 428
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 78: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/78.jpg)
copy 2019 Darling Consulting Group Inc Page 78
Strategy Discussion
Loan Pricing
How has pricing changed given recent yield curve movements Falling rate protection remains critical
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 79: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/79.jpg)
copy 2019 Darling Consulting Group Inc Page 79
Liquidity Interest Rate Risk amp Capital
Executive Summary
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
Year 2 NII ( Change from Year 1 - Base)Base
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailP i t th 11302018 i th d i t D 100BP i
-1000
700
-1562
548
494
10121255
249
-61
12571148
-22
-73
-24
-25-21-29 -24 -22 -21
-27 -29
-89-21 -21 04 -06 -35
-6125 14 25 21 -02
12531266
-123-16611301176
-90
477
-2284 -768-638-2000
1068
-453-243 -109
468
488
1234
516397 345
429359
485
431 407285
-62
-100-200 -100 -100 +400
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 80: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/80.jpg)
copy 2019 Darling Consulting Group Inc Page 80
IRR Overview
Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 81: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/81.jpg)
copy 2019 Darling Consulting Group Inc Page 81
IRR Overview
EVE Analysis Deposit Study vs Shorter Life Bias
00
20
40
60
80
100
120
140
EVE Ratio (EVEEVA)
-250
-200
-150
-100
-50
00
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
140000
Economic Value of Equity ($000s)
00
20
40
60
80
100
120
EVE Ratio (EVEEVA)
-700
-600
-500
-400
-300
-200
-100
00
100
200
EVE ($) - Pct Chg from 0 Shock
0
20000
40000
60000
80000
100000
120000
Economic Value of Equity ($000s)
65 year life (Study) 25 year life (Stress)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 82: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/82.jpg)
copy 2019 Darling Consulting Group Inc Page 82
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOSTier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)Capital Ratios are based upon the 9302018 call report
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans AssetsNet Loans DepositsLoan Loss Loans
1682 1631 1595 1570 1572
793 775 802
$1624$10536306 301
$10493 $10415298
$8437$1510$1782 $1597
$10591296
$1585
$8861 $8849
1000500
17531083
1700
1638 16401033
16631052 10351057
$10531297
$8879$398$395
951 953
$8485$8203 $8352 $8223$8589
$500792 786
$8733$535$435
057 058
057946 922
955056058
11302018 8312018 5312018 2282018 11302017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 83: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/83.jpg)
copy 2019 Darling Consulting Group Inc Page 83 Page 83 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss growth expectations for 2019
o Differentiate offensive and defensive strategies - Discuss recent pricing trendshellip How much more can we lag on the NMD base - Review balance migration and retention trendshellip What were differences in 14 and 16 Month Special
activity - Discuss wholesale funding game plan Lending - Discuss growth expectations for 2019 $25 million of quarterly fixed rate growth (see simulation) - Discuss pricing and structurehellip Can we keep pushing yields higher - Review capacity for adding duration within the portfolio - Protect against falling rateshellip If cannot include at origination can we explore synthetic avenues via
derivatives
Investments - Discuss plan for upcoming cash flow and any excess cash - Discuss on-balance sheet liquidity cushion and future ability to shift cash flow towards loans
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 84: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/84.jpg)
copy 2019 Darling Consulting Group Inc Page 84 Page 84 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Increase near-term
exposure to rising rates
Earnings Higher run rate of
income
Credit Rates increase greater
than expected over the long-term
Prepayment risk if rates fall
Potential Strategy
$25MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 85: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/85.jpg)
copy 2019 Darling Consulting Group Inc Page 85 copy 2019 Darling Consulting Group Inc Page 85
Lending Initiative Fixed Growth w Rising Rate Exposure
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 86: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/86.jpg)
copy 2019 Darling Consulting Group Inc Page 86 Page 86 copy 2019 Darling Consulting Group Inc
Originate and hold $25 million fixed rate loans - $15MM CRE - $10MM Res
Funded with ST FHLB advances Incorporate 2 Year Interest Rate Swap
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Neutralize exposure to
rising rates over next two years
Earnings Higher run rate of
income
Credit Prepayment risk if rates
fall Accounting risk Counterparty risk Price risk
Potential Strategy
$25MM Loan Growth Funded Short and Interest Rate Swap
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 87: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/87.jpg)
copy 2019 Darling Consulting Group Inc Page 87 copy 2019 Darling Consulting Group Inc Page 87
CRE Growth w 2 Year Swap
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $795 $852 $552 $309
2 $1011 $1129 $552 $102
3 $970 $1095 $552 $152
Total $2776 $3076 $1656 $563
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 88: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/88.jpg)
copy 2019 Darling Consulting Group Inc Page 88 Page 88 copy 2019 Darling Consulting Group Inc
Case Study 2
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 89: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/89.jpg)
copy 2019 Darling Consulting Group Inc Page 89
Liquidity Interest Rate Risk amp Capital
Executive Summary
LIQUIDITYBasic Surplus (Min)Basic Surplus w FHLB (Min)
Basic Surplus w FHLB amp Brokered (Min)
Borrowings Assets (Max)
Brokered Deposits Assets (Max)
Total Wholesale Funds Assets (Max)
25001500
1500 422 430 336
55 691000 272 280 243 228 241
82 95 61
340
465100 00 57 73
14 19
14 19 89 111 96
10312018
7312018 4302018 1312018 10312017
32 38
305
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 90: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/90.jpg)
copy 2019 Darling Consulting Group Inc Page 90
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 91: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/91.jpg)
copy 2019 Darling Consulting Group Inc Page 91
Liquidity Overview Basic Surplus
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 92: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/92.jpg)
copy 2019 Darling Consulting Group Inc Page 92 copy 2019 Darling Consulting Group Inc Page 92
90-Day Liquidity Forecast
Net Loan Growth $5MM
Net Deposit Flows $10MM
Net Cash Flow $5MM
CashInvestment Cash Flow Due $15MM
Wholesale Funding Maturities $0MM
How Much Liquidity Do We Need
What is the strategy with the cash surplus How aggressive do we need to be with deposit pricing How can increase loan activity
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 93: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/93.jpg)
copy 2019 Darling Consulting Group Inc Page 93
Strategy Discussion Loan Pricing
Originations falling Why Accelerated refinancing activity Losing deals on price
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 94: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/94.jpg)
copy 2019 Darling Consulting Group Inc Page 94
Deposit Pricing vs Local Market
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 95: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/95.jpg)
copy 2019 Darling Consulting Group Inc Page 95
INTEREST RATE RISKEarnings at Risk (Max)
Pct() Change in Net Interest Income with+- 200bps ramp (12 Mths)Year 1 NII ( Change from Year 1 - Base)
Down 200BP
Up 200BP
24 Month NII ( Change from Base)
Down 200BP
Up 200BP
Core Funding Utilization (Max)BaseDown 200BPUp 200BP
EVE AnalysisPre-shock EVE ratioPost-shock EVE ratio
Basis Point Change in EVEPercentage Change in EVE
Policy Guidelines are for -200 scenario See EVE report for detailPior to the 10312018 review the down scenario represents a Down 100BP scenario
1000
1500
800
-1083
456
390
11831381
285
-71
05
-32
-02
-06-09-20 -13 -08 -09
-15 03
-3318 36 31 14 35
-31
1270
-130 1140
414
-861 -2000
-198
374
424
443325 304
348301
380
352 307261
-31
-100-200
Liquidity Interest Rate Risk amp Capital
Executive Summary
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 96: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/96.jpg)
copy 2019 Darling Consulting Group Inc Page 96
IRR Overview Base +200BP (Parallel amp Flat) -200BP (Parallel amp Steep)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 97: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/97.jpg)
copy 2019 Darling Consulting Group Inc Page 97
IRR Overview Core Funding Utilization
Assets ( gt 60 Months)
Cumulative Cumulative Cumulative CumulativeCore Liabilities ( gt 60 Months) Volume Volume Volume Volume
Equity
Other Liabilities
DDA
NOW
Savings
Utilization
Excess
8997
74303
132849 130877
Excess
244348
285
7025
7233165306
58546
65306
58546
464
244348
456
111499
49611
6386
64499
149136
244348
244348
390
Up 400BP 24M
113471
49611
64499
69529
49611
6386 6386
64499
Excess
64499
65306 65306
25284
90590
6386
Down 200BP Up 200BP
Excess
INTEREST RATE SCENARIOS
95212
49611
Base
50967
116273
17481958546 58546
Discuss in terms of capacity to add fixed rate assets
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 98: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/98.jpg)
copy 2019 Darling Consulting Group Inc Page 98
Liquidity Interest Rate Risk amp Capital
Executive Summary
CAPITAL RATIOS
Tier 1 Leverage (Min)
Total Risk Based (Min)
Common Equity Tier 1 (Min)
Capital ratios are from 9302018 call report data
OTHER BALANCE SHEET INFORMATIONBalance Sheet SpreadTotal Assets (Millions)Investments (Millions)Gross Loans (Millions)Deposits (Millions)Borrowings (Millions)Net Loans Assets
Net Loans DepositsLoan Loss Loans
800 1551 1558 1536 1519 1532
8000 724 717 753
$845$4606323 342
$4572 $4546329
$3527$814$1010 $775
$4840312
$978
$4171 $3922
1200800
16321051
1639
1600 16161048
16181077 10581091
$4820306
$4214$148$92
898 886
$3493$3480 $3492 $3398$3807
$172758 742
$3863$207$67
070 071
070831 828
884070071
10312018
7312018 4302018 1312018 10312017
Policy Guidelines
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 99: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/99.jpg)
copy 2019 Darling Consulting Group Inc Page 99 Page 99 copy 2019 Darling Consulting Group Inc
Elements of Strategies Funding - Discuss pricing strategy given Fed pause and liquidity needs - Review CD special activityhellipnew money vs cannibalization - Discuss next steps for MMDA pricing - Discuss strategy for upcoming CD special maturities - Update on municipal deposit activity and pricing strategy - Reviewdiscuss potentially volatile liabilities High-rate deposit and uninsured deposit
concentrations Lending - Discuss capacity for fixed rate lending - Discuss loan pricing activity given market rally - Review upcoming loan repricingsmaturities InvestmentsOther - Revisit hedging opportunities to protect against falling rates - Discuss strategy for excess cashhellipreview bond extension strategy and call protection securities
Strategy Formulation
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 100: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/100.jpg)
copy 2019 Darling Consulting Group Inc Page 100 Page 100 copy 2019 Darling Consulting Group Inc
Execute $25MM at-the-money floor Recent FASB rule
changing on hedge accounting allows for a macro-level hedge strategy that did not exist before
Liquidity
Need to post collateral No material change
IRR
Protects against worst case scenario falling rates
Earnings Initial cost today
Accounting risk Price risk Counter-party risk Rates increase
Keys to execute Update policy ALCOBoard education Accounting understanding
Potential Strategy
$25MM Interest Rate Floor
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 101: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/101.jpg)
copy 2019 Darling Consulting Group Inc Page 101 copy 2019 Darling Consulting Group Inc Page 101
Loan Floor
Year -200 bps -200 Stpn Base
1 $524 $559 $552
2 $511 $589 $552
Total $1035 $1148 $1104
Year -200 Stpn Base +200 bps
1 $186 $-87 $-87
2 $415 $-87 $-87
3 $415 $-88 $-88
Total $1016 $-262 $-262
$25MM At-the-Money Floor
Pricing reflective of Q4 levelshellipprice of ATM floor much higher today
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 102: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/102.jpg)
copy 2019 Darling Consulting Group Inc Page 102 Page 102 copy 2019 Darling Consulting Group Inc
Purchase $15MM of Jumbo MBS 30Y (GNMA)
Funded with cash
Liquidity
Liquid Assets Neutral Total Liquidity Neutral
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings
Higher run rate of income immediately (donrsquot have to wait for growth to materialize)
Rates rise faster than expected (although IRR position holds asset sensitive posture)
Opportunity cost if rates rise
Price risk Prepayment optionality if
MBS Premium risk
Potential Strategy
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 103: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/103.jpg)
copy 2019 Darling Consulting Group Inc Page 103 copy 2019 Darling Consulting Group Inc Page 103
Cash Extension
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $325 $359 $174 $25
2 $503 $586 $157 $-129
3 $369 $486 $158 $-109
Total $1197 $1431 $489 $-213
$15MM Cash Extension into Bonds
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 104: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/104.jpg)
copy 2019 Darling Consulting Group Inc Page 104 Page 104 copy 2019 Darling Consulting Group Inc
Originate and hold fixed rate mortgages - $15MM 30Y resi next
90 days
Funded with 1 month amp 1 Year FHLB advances
Liquidity Liquid Assets
NeutralSlight Decline Total Liquidity Down
Marginally Liquidity Assessment
Still Strong
IRR Protect against falling
rates Still maintain asset
sensitive posture
Earnings Higher run rate of
income in all scenarios modeled
Credit Prepayment risk if rates
fall
Potential Strategy $15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 105: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/105.jpg)
copy 2019 Darling Consulting Group Inc Page 105 copy 2019 Darling Consulting Group Inc Page 105
Hold Fixed Rate Mortgages
Year -200 bps -200 Stpn Base +200 bps
1 $524 $559 $552 $580
2 $511 $589 $552 $602
Total $1035 $1148 $1104 $1182
Year -200 bps -200 Stpn Base +200 bps
1 $248 $284 $200 $152
2 $428 $517 $222 $16
3 $411 $512 $218 $24
Total $1087 $1313 $640 $192
$15MM Loan Growth Funded Short
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 106: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/106.jpg)
copy 2019 Darling Consulting Group Inc Page 106
Investments
Loans
Deposits
Wholesale
Other
ALCO Action Items
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-
![Page 107: Conquering the Liquidity and Pricing Dilemma on … Resources...Annual Interest Expense $184,088.85 $199,232.12 $444,755.93 $349,631.73 $397,516.74 $508,925.11 $2,084,150.48 Alternative](https://reader036.vdocument.in/reader036/viewer/2022070916/5fb61fcf31763168eb351fae/html5/thumbnails/107.jpg)
copy 2019 Darling Consulting Group Inc Page 107 Page 107 copy 2019 Darling Consulting Group Inc
Closing Thoughts
Let Your Balance Sheet Talk Squeeze More Out of Your Lending Success by Looking Through
Different Lenses
Maximize Availability at FHLB (and donrsquot forget the dividend impact)
Be Prepared for Your Next Exam (Liquidity)
Deposit Strategies that Make Sense Given Your Liquidity Position
Derivatives for Community ldquoBankingrdquo A Game Changer
Donrsquot Forget About Declining Rates
ALCO as a Profit Center for Strategic Decision Making
copy 2019 Darling Consulting Group Inc
- FHLB Des Moines Regional Member Meetings
- Slide Number 2
- Todayrsquos Focus
- Liquidity Management 5 Areas of Focus
- FirsthellipAddressing Regulatory Concerns
- Liquidity Trends
- Slide Number 7
- Identify Liquid Asset Cushion
- Strategy Considerations
- Slide Number 10
- Wholesale FundingEncouraged not Villainized
- Total Liquidity Focus
- Slide Number 13
- Revisit Your Risk Monitor
- Management Response
- Identify At-Risk Customer Concentration(Potentially Volatile Liabilities)
- Areas of PVLshellipRegulatory Focus
- Regulatory Concerns High Rate Deposits
- Local Deposit Rates vs FDIC Rate Caps
- High Rate Deposit (per National Rate Caps)
- Uninsured Deposits Relationships
- Uninsured Customer Segmentation
- Potentially Volatile Uninsured Customer Base
- Slide Number 24
- Dynamic Liquidity Forecast
- Dynamic Liquidity Forecast
- Liquidity Stress Testing
- Liquidity Stress Testing amp Key Components
- Worst Case Scenario amp Remediation Plan
- Slide Number 30
- Industry Deposit Pricing Trends
- The Attrition Concern
- Better to Be Offensive or DefensiveCannibalization
- DEFENSIVE DEPOSIT TACTICShellipMonitoring and Managing Attrition
- Analyzing Attrition
- Watch List Top 10 Outflows
- Watch List Declining Balances
- Canrsquot Afford to Lose Top Customers Today
- Customer Segmentation
- Customer Profile OpportunityRisk
- Customer Profile High Value amp Low CosthellipRisk
- Next Move on MMDAs
- MMDA Tier Analysis ndash Alternative Adjustments
- MMDA Tier Analysis ndash Pricing Flexibility
- Introducing New MMDA Product
- Legacy MMDA Trends
- OFFENSIVE DEPOSIT TACTICShellipDeposit Promotions and Campaigns
- Maximize New Money amp Minimize Cannibalization
- Unsuccessful CD Promotion
- What Works Better CD vs MMDA Promotion
- New Market Promotion
- Indexed MMDA New Money Match
- Successfully CD Promotion New Money Minimum
- CD Specials Post Maturity
- Lending Strategies
- Lending Discussion Items
- Loan Pricing
- Lower Rates Opportunities amp Challenges
- Loan Repricing Schedule
- CRE Repricing Risk Opportunity
- Slide Number 61
- Interest Rate Risk
- Slide Number 63
- Donrsquot Fall into the Flat Yield Curve Trap
- FirsthellipUnderstand Your IRR Position
- Strategy Considerations
- Liability Sensitive
- Strategy Considerations
- Slide Number 69
- Case Study 1
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Deposit Pricing vs Local Market
- Strategy Discussion
- Strategy Discussion
- Strategy Discussion
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Lending Initiative Fixed Growth w Rising Rate Exposure
- Potential Strategy
- CRE Growth w 2 Year Swap
- Case Study 2
- Executive Summary
- Liquidity Overview
- Liquidity Overview
- 90-Day Liquidity Forecast
- Strategy Discussion
- Deposit Pricing vs Local Market
- Executive Summary
- IRR Overview
- IRR Overview
- Executive Summary
- Strategy Formulation
- Potential Strategy
- Loan Floor
- Potential Strategy
- Cash Extension
- Potential Strategy
- Hold Fixed Rate Mortgages
- ALCO Action Items
- Closing Thoughts
-